Legal Talk: Leaving money to family in a will

With Elmhirst Parker Solicitors, Barnsley

The realm of financial planning, wills and inheritance tax can be a confusing subject.

People are often unsure of the best way to pass on their wealth. Should they wait until after they die to leave the monetary bequeaths in a will? Or is it better to gift their loved ones while still alive?

There is no right or wrong answer. But if you are in the fortunate position that you are able to give younger relatives a head start towards financial freedom, here are some options that are available.

Outright Gifts

An outright gift is the most straightforward type of gift. It simply involves the outright transfer of assets from one person to another with no restrictions.

This type of gift is most suitable for people who want to pass over modest amounts or give to responsible and capable adults whom they trust won’t squander the money. If the beneficiary is under 18, the money will be held in a trust until they turn 18.

The downside to outright gifts is that they can be seen as a matrimonial asset so could be lost in divorce. They can also be used to pay creditors if a beneficiary becomes bankrupt. If a beneficiary is a young adult, it puts a lot of responsibility on them with very little protection of the monies whittling away.

Remember also that you must explicitly state in your will that you would like any grandchildren to benefit from your estate; without saying so, there is no legal obligation from their parents to distribute your money to them.

Age Contingent Gifts

If you have young adult relatives you want to leave money to, you can opt for an age contingent gift. This is where you specify that they cannot receive any monies until a certain age, usually 21 or 25.

The advantage of this option is that you prevent money from being spent unwisely by a young person who you feel is not mature enough to deal with it responsibly. The monies will be held in a trust until the beneficiary reaches the contingent age.

However, there can be tax implications with this option, so you should seek legal advice before adding to your will.

Discretionary Trust

This option may work for you if you have multiple beneficiaries, such as more than one child or grandchild. Instead of a single beneficiary that’s entitled to an asset, there is a ‘class’ who could all benefit.

The trustees have control over the trust fund and can distribute to any of the beneficiaries whenever they deem it appropriate. You can leave a letter of wishes in your will for what you’d would like the primary focus to be, such as paying education fees or for house deposits.

A discretionary trust can protect money from being spent unwisely, being lost in a divorce or bankruptcy, or being squandered through any other means.

Gifting while still alive

Many people would prefer to see their money being used and enjoyed by loved ones while they’re still here.

So long as you don’t die within seven years, you can gift any amount of money to relatives and avoid paying Inheritance Tax on those gifts.

If you would prefer not to risk that, there are other tax-free options.

You can gift up to £3,000 a year with what are called lifetime gifts. But the disadvantage is that it is £3,000 in total, not per person, which may be an issue if you have multiple descendants.

If your child or grandchild is getting married, you can gift them £5,000 or £2,500 towards the wedding.

You can also send regular amounts to a junior ISA with a limit of £9,000 a year. Only parents can set up a junior ISA, and the regular payments must not be detrimental to your personal cost of living.

Top 3 things to remember about Inheritance Tax:

  • Anything left to a spouse is exempt
  • You don’t pay IHT on the first £325,000 of an estate; anything above that is taxed at 40%
  • This total increases to £500,000 if you pass your main property to a child or grandchild